Infosys revenue guidance cut spooks investors

Infosys shares fall 8.81%; Vishal Sikka says slowdown in revenue growth was unexpected and unanticipated


Infosys shares fell around 8% as the company forecast a 10.8-12.3% sales growth in US dollar terms for 2016-17, down from the previous forecast of 11.8-13.8%. Photo: Hemant Mishra/Mint
Infosys shares fell around 8% as the company forecast a 10.8-12.3% sales growth in US dollar terms for 2016-17, down from the previous forecast of 11.8-13.8%. Photo: Hemant Mishra/Mint

Bengaluru: Infosys Ltd, India’s second largest software services exporter, lowered its full-year revenue forecast after falling short of earnings estimates in the quarter ended 30 June, prompting investors to punish the stock.

Shares of the Bengaluru-based company plummeted 8.81% on Black Friday for investors, who lost Rs.23,796.34 crore of wealth in the process on BSE.

Infosys reported a 2.2% sequential dollar revenue increase to $2.5 billion in the June quarter, hurt by the weak performance of its consulting practice and slow revenue translation from the large deal wins made in the last one year.

The management now expects lower dollar revenue growth of between 10.8% and 12.3% in the year to 31 March, against the earlier expectation of 11.8-13.8% growth. In constant currency terms, Infosys management now expects growth of between 10.5% and 12%, against an earlier estimate of 11.5-13.5%.

Industry body Nasscom has estimated India’s $150 billion outsourcing sector to grow between 10% and 12% this fiscal year.

Traditionally, technology outsourcing firms record their highest business in the April-June and July-September quarters.

Infosys’s sequential growth was just a notch better than the 2% sequential growth in April-June of 2014 (it went on to grow at 5.6% in 2014-15).

This downward revision of 150 basis points from its earlier full-year dollar guidance means Infosys expects to do $140 million less in new business this year and expects to add, at best, $1.17 billion in incremental revenue. A basis point is 0.01%.

Net profit declined 4.1% to $511 million from $533 million in the April-June period. In rupee terms, revenue grew sequentially by 1.4% to Rs.16,782 crore while net profit declined 4.5% to Rs.3,436 crore.

A Bloomberg survey of 27 analysts had forecast Infosys to report revenue of $2.54 billion, or Rs.17,028.6 crore, in the quarter. The analysts estimated a net profit of $511.74 million, or Rs.3,435.80 crore.

“This is a big let-down,” said a Mumbai-based analyst at a domestic brokerage firm, who did not want to be named. “Historically, the company has been very transparent in its commentary to the market. But this time, the company missing its growth target and suddenly coming back and making such a sharp downward revision should now make the new management relook at the commentary. Even when U.B. Pravin Rao (chief operating officer) had warned of slow growth in mid-quarter commentary, he did not mention that the company will not be able to keep up with its full-year guidance.”

None of the analysts tracking Infosys had expected such a poor performance by the company which, since September 2014, had shown signs of a turnaround, regaining the industry bellwether tag by growing 9.1% last year.

JPMorgan Chase and Co. analyst Viju George wrote in a note to investors that Infosys’s June quarter earnings were a “clear disappointment”.

“What also worries is the sub-par growth in the developed markets in a seasonally strong quarter... Pricing was also weak in this quarter. Admittedly, we are struggling to find positives in this print barring margin management to some extent,” wrote George.

Chief executive officer Vishal Sikka’s “new and renew” strategy has been pinned on the user-centric approach of Design Thinking and bringing grassroots innovation through Zero Distance to make the company’s software engineers go beyond the scope of their work to offer new solutions.

The June quarter performance and revision of earnings guidance doesn’t mean that strategy has run out of steam or that organizational and management change turned out to be a damp squib, said Infosys and many analysts.

“Our top 25 clients have grown at over 4.4% in the quarter. So all our steps like Design Thinking, Zero Distance and using consultancy as the tip of spear have helped us increase our business from largest clients,” Sikka told Mint.

“Our core strategy is kicking in and it is happening in great scale. We had a slowdown in revenue growth…this was unexpected and unanticipated and there was slowness in consulting practice and in projects (large deals) where there was slow ramp-up. But overall, I’m happy with the overall performance but disappointed with the revenue growth,” he added.

After four quarters, Tata Consultancy Services Ltd (TCS) clocked higher dollar revenue growth than Infosys. TCS reported a 3.7% increase in dollar revenue for April-June.

“Yes, this is weak growth but then, you have to live with these ups and downs of business. Statistically, no one company can report quarter after quarter of industry-leading numbers. These measures helped us grow last year and just because we had one weak quarter, will be a wrong way to read our story,” said a senior Infosys executive on condition of anonymity.

Infosys’s aspiration of posting higher growth than Cognizant Technology Solutions Corp. seems to have received a setback. Infosys’s upper-end dollar revenue growth forecast of 12.3% is lower than Nasdaq-listed Cognizant’s 13%.

“You got to cut some slack. Yes, it’s a weak performance. Surely, Infosys has to live (with) the pain for this year. But no turnaround is a smooth ride. So these weak performances are a given. But nobody should question the changes the new management has tried to bring in,” said the head of research at a Mumbai-based domestic brokerage firm, who didn’t want to be named.

At the heart of Infosys’s underperformance was the 1.13% sequential decline posted by the consulting and package implementation division.

Infosys, like other home-grown technology firms, helps roll out and maintain enterprise application software, such as SAP and Oracle, for large Fortune 1000 firms.

The consulting and package implementation division accounted for $812.1 million, or about 32% of the company’s revenue, in the June quarter. This division posted 11.5% growth last year, higher than Infosys’s 9.1% dollar revenue growth.

Finally, some of Infosys’s clients, especially one client in the banking space and one healthcare firm, have still not started outsourcing work promised earlier, denting its revenue growth.

Hearteningly for Infosys, the company expects to see business from its clients picking up in the coming quarter and for this reason, it expects at-best dollar revenue growth of 12.3%.

The company improved its large deal wins to over $800 million in the June quarter, up from $750 million of new deal wins in the January-March period.

Sikka also assuaged fears of weakness in demand for its services offered to companies in the UK, after Britain voted last month to leave the European Union, saying that for now, it is business as usual.

“While the client-specific situations could be short-term anomalies and the healthy deal pipeline—$3 billion in the last four quarters—lends downside support, a repeat of 1Q events (slower ramp-ups and delayed discretionary spend) given post-Brexit uncertainties is a heightened risk, in our view,” wrote Pankaj Kapoor, director of India IT services and software equity research at JM Financial Institutional Securities Ltd, in a note titled After the Storm.

In the quarter to June, Infosys’s business improved 2.4% in the US, which brings 62% of total business, but declined 0.3% in Europe, which accounts for 23% of revenue. The banking and financial services space, which brings 32.8% of total revenue, grew 1.7%.

The company added 95 new clients in the first quarter, taking the total number of customers to 1,126. It had added 89 clients in the January-March period.

However, in a double whammy to Sikka, Infosys’s attrition rate spiked to 15.8% at the end of the fiscal first quarter from 12.6% at the end of March. The management explained that historically, the April-June quarter has seen more employees leave the firm.

READ MORE